Supply Constraints Should Mean A Healthy China

THE extent of the weakness in China ‘s polyolefins market has become more apparent as a result of reports that a much-anticipated increase in Middle East production hasn’t happened.

Back in February, oil production in Saudi Arabia had been raised to 8.9m barrels a day from around 8.5m barrels in January, a Middle East industry source told the blog.

This was in response to the unrest in Libya , and elsewhere in the Middle East , that had driven crude prices to levels viewed by OPEC as threatening the global economic recovery.

“However, it quickly became obvious that the extra oil being produced by Saudi wasn’t helping the market as it was sour, whereas the shortage was in the light, sweet crude that Libya produces,” the source added.

Saudi oil production was therefore cut back to 8.4m barrels a day in March and 8.6m barrels a day in April, he said.

“Crackers in the Kingdom, are as a result, still running at operating rates of approximately 85% – the same as in Q4,” he added

If all the crackers were running at 100% this would amount to 1m tonnes of more ethylene production – or one additional worldscale plant.

And when you add this to the 4% reduction in ethylene production by Sinopec in April and the 10% reduction reported to have occurred in May, markets should, if growth was strong, be in a lot better state.

The Asian cracker turnaround season is also still in progress, albeit nearing its end – and we are picking up reports of further logistics problems that are constraining exports from the Middle East.

But last week saw a $10-30/tonne fall in polyethylene (PE) prices in China , according to our colleagues at ICIS pricing – despite this pretty favourable supply scenario.

Refiners have been cutting back on fuel output because government price controls have prevented them from fully passing-on higher costs of crude.

A further factor behind this latest diesel shortage – following the one last December that also led to petchem production cuts – has been the switch to diesel-fired generators by manufacturers of finished goods. Diesel generators have been switched-on because of reduced supply from coal -and hydro-based power facilities.

But from a petrochemicals perspective we are coming up to the peak manufacturing season – when petchems are normally imported in great volume for re-export as finished goods to the West in time for Christmas.

Here are a couple of suggestions for chemical company CEOS:

1.)Do you really want to nail your reputations on forecasting a strong Q3 based on China ?